Pakistan is facing ‘serious economic challenges’ and it needs to carry out a set of comprehensive economic reforms, the International Monetary Fund said hours after it approved a financial assistance of $6.7 billion to prevent it from a brink of economic collapse.
“Pakistan is facing serious economic challenges. Overall vulnerabilities and crisis risks are high, with subpar growth and unsustainable fiscal and balance of payments positions,” said Nemat Shafik, IMF Deputy Managing Director and Acting Chair.
Pakistan’s 2013-14 federal budget represents an important initial step towards the needed fiscal consolidation, she said.
“However to ensure medium-term fiscal sustainability and create fiscal space for social and investment spending, it is important to raise the tax-to-GDP ratio, including by broadening the tax base through a reduction in exemptions and concessions and extending taxation to areas currently not fully covered by the tax net,” she said.
Tax administration
Tax administration overhaul is also required, and provinces should contribute fully to the adjustment effort, she added.
The IMF official said that monetary and exchange rate policies should be geared to rebuilding external buffers, direct lending to the government should cease and efforts to improve independence of monetary policy need to be stepped up to pave the way for improved price stability.
Shafik said that risks to the banking sector are manageable, although the undercapitalisation of vulnerable banks needs to be addressed.
Inclusive growth
“To achieve sustained and inclusive growth, short-term macroeconomic measures must be complemented by significant structural and governance reforms.
“The recently announced energy policy will address the long-standing problems in the sector, which constitute the most crucial constraint on growth and have generated large fiscal costs,” Shafik said.
In addition, the trade regime and public sector enterprises needs to be liberalised, she said.
Fiscal consolidation
Noting that protecting the most vulnerable from the direct and indirect impacts of fiscal consolidation and price adjustments is a priority, she said coverage and benefits of these programmes should be expanded as savings from tariff adjustments and fiscal space are realised.
According to IMF, Pakistan’s growth trajectory has borne the tolls of both internal security and macroeconomic imbalances, as well as an uncertain global and regional environment.